Value Unleashed

Blog

14Oct 2016

Canadian M&A Market Recap: Week Ended Oct 14, 2016

Posted By: Louis Goldberg, Miranda Li, Michael Mazza and Paris Aden

|

Comments: 0

Market Update

Last week’s deal count of 19 was below average and the TSX remained just below its 52-week high. Oil prices reached a 52 week high after OPEC reached a deal last week to cut oil production. The TSX composite underpreformed the S&P 500 index by 1.8% last week on a U.S. dollar basis.

U.S. debt markets are gaining traction, as there continues to be greater than three syndicated deal observations in 30-day rolling bank books as well as higher debt/EBITDA multiples.

The Valitas Canadian Private Business Landscape series is a comprehensive analysis of M&A potential in the Canadian business landscape. We focus primarily on the top 25 industries in Canada based on the number of companies with EBITDA greater than $3 million. This series presents various metrics, fragmentation analyses, economies of scale insights, capital markets factors, and a discussion of which industries are the best candidates for ongoing consolidation.

In this eighth instalment of the series, our team has synthesized the combined impact of fragmentation, economies of scale, capital availability and multiple arbitrage to score each industry on overall consolidation potential. The aim of this analysis is to provide a clear indication of which industries have the greatest consolidation potential. Our progression of tests and analyses is summarized below:

The Consolidation Potential Score (CPS) combines these four factors into a single metric to determine the extent to which economic fundamentals and capital markets support consolidation in a given industry. It is derived through two main factors. The first factor is the fragmentation score (FS), which indicates the abundance of acquisition targets. The second factor, the Consolidation Coefficient (CC), is a measure of the benefits of consolidation. The CC is a scaled score (0 to 100) of the weighted average of economies of scale, multiple arbitrage and leverage capacity (each weighted 50%, 25% and 25% respectively). The product of these scores is scaled from 0 to 100 to yield the CPS.

The scatter plot below shows the FS versus the CC for the 112 industries studied. It also shows the ranking of the top 15 industries by their CPS. It is important to note that the FS and CC, and by extension the CPS, are relative scores so conclusions can only be made in relation to other industries. The scatter plot is shown in log scale and further segmented into quadrants. The quadrants are divided between the top and bottom halves by industry count for the consolidation coefficient and fragmentation, respectively.

The bottom right, green-shaded quadrant represents industries that are fragmented for good reason.

Finally, the top right, non-shaded, quadrant shows industries that have the greatest potential for consolidation.

The tables below rank the industries with the greatest and least consolidation potential. They also break out the constituent fragmentation (FS) and correlation coefficient (CC) scores for context. Based on the CPS, one would expect that those industries that score high would be fragmented, while those that have low CPS scores would be consolidated.

The top two results show that Diversified Metals and Mining and Oil and Gas Exploration and Production have by far the greatest consolidation potential. This is because they both have exceptional benefits to consolidation while remaining highly fragmented. For the most part, industries that typically made it into the top 15 were substantially fragmented while also have some degree of consolidation benefit. An interesting exception to this is Application Software which shows a moderate FS with a fairly high CC.

For those industries in the bottom 15, the number of companies varies but is relatively low. One would expect that industries on this list would be highly consolidated. There are a few mature, consolidated industries such as Tobacco and Silver. However, most of the list would be in the “fragmented for good reason” category.

By virtue of the large number of companies in our top 25 industries list, most of them rank high in consolidation potential. Only six industries on this don’t rank in the top 25 for consolidation potential: Hotels, Resorts and Cruise Lines, Building Products, Automotive Retail, Oil and Gas Refining and Marketing, Office Services and Suppliers, and Real Estate Operating Companies.

It is not surprising that industries such as Oil and Gas Exploration and Production as well as Diversified Metals and Mining have high CPS rankings as these two industries have consistently been within the top industries for all analyses done thus far. What is surprising is how fragmented these industries remain.

Having synthesized various economic and capital markets factors into a score of consolidation potential, we have revealed some unique insights on where the greatest consolidation potential exists in Canada. Going forward we will dig deeper into specific industries.

Stay tuned…

Weekly Canadian Private Market M&A Report

Announced Deals

Hydrate Resources to Acquire Wolfpack Capital

Hydrate Resources Corp, which operates in the oil and gas industry, has agreed to acquire Wolfpack Capital Corp, a Canadian capital pool company. No transaction terms were released.

NSX Silver to Acquire Residence Cameron

NSX Silver Incorporated (TSXV:NSY.H), which focuses on the acquisition, exploration, and development of silver and associated metals in Mexico, has agreed to acquire Residence Cameron Limited, which owns multi-unit residential properties. Transaction value is estimated to be $5 million.

Laguna Blends to Acquire ISO International

Laguna Blends Incorporated (CNSX:LAG), a network marketing company that develops, produces, distributes, and sells a line of high-protein-content functional beverages derived from hemp in the United States and Canada, has agreed to acquire ISO International, LLC, which distributes and markets cannabidiol (CBD) bottled water and related pharmaceutical grade CBD products. Transaction value is estimated to be $0.7 million.

Closed Deals

YouTube to Acquire FameBit

YouTube has agreed to acquire FameBit, LLC, a Canadian company that provides digital marketing services and operates an online marketplace that allows businesses to find, manage, fund, and track influential video campaigns from the stage of connection to campaign delivery. No transaction terms were released.

AECOM to Acquire Flint Transfield Services

AECOM (NYSE:ACM), which engages in designing, building, financing, and operating infrastructure assets worldwide, has agreed to acquire Flint Transfield Services Limited, a Canadian company that provides operational and maintenance support services to oil and gas, petrochemical, mining and mineral processing, and power generation industries in Canada. No transaction terms were released.

Colliers International Group to Acquire Bollingbrook

Colliers International Group Incorporated (TSX:CIG), which provides commercial real estate services to real estate occupiers, owners, and investors worldwide, has agreed to acquire Bollingbrook Limited, a UK based company that provides commercial building consultancy, quantity surveying, and project management services. No transaction terms were released.

Canbriam Energy to Acquire Northpoint Resources

Canbriam Energy Incorporated, a Warburg Pincus, BlackRock, ARC Financial, Teachers' Private Capital backed business that operates as an exploration and production company that focuses on natural gas aspects in Montney, Canada, has agreed to acquire Northpoint Resources Limited, which produces of 7,200 million cubic feet per day of natural gas. Transaction value is estimated to be $10 million.

Parking By Phone, a U.S. based company, has agreed to acquire Pango USA LLC, which provides smart parking payment and management system that helps users to pay for, manage, and track parking in various cities in the United States, Europe, and Israel. No transaction terms were released.

Alithya Group to Acquire PRO2P

Alithya Group Incorporated, a TELUS Ventures backed company that provides information technology and management consulting services, has agreed to acquire PRO2P, which offers a full range of services to help customers in implementing and operating business solutions based on Oracle applications. No transaction terms were released.

Premium Brands Holdings to Acquire Belmont Meat Products

Premium Brands Holdings Corporation (TSX:PBH), a Canadian manufacturer and distributer of food products in North America, has agreed to acquire Belmont Meat Products Limited, which develops, processes, and manufactures steak and ground beef products for foodservice and retail clients. Transaction value is estimated to be $50 million.